What Is A Qualified Disability Trust Article


Trusts are not allowed the deduction for personal and dependency exemptions under § 151 of the Internal Revenue Code.  Instead, a trust that under its governing instruments is required to distribute all of its income currently, is called a “Simple” Trust, and is allowed an exemption of $300 (Code § 642(b)).  This would not apply to Special Needs Trusts, since Special Needs Trusts must be discretionary, and therefore do not require distribution of all of its income by the terms of its trust agreement.  A Trust that does not require distribution of all its income by the terms of the trust agreement is called a “Complex” Trust, and is allowed an exemption of $100.

A “Qualified Disability Trust” or “QDT” is allowed the same exemption as an individual under IRS Code §642(b)(2)(C).  A QDT is a disability trust as referred to in the Social Security Act, Sec. 1917(c)(2)(B)(iv), which is commonly referred to as 42 USC 1396p(c)(2)(B)(iv) (U.S. Code).

42 USC 1396p(c)(2)(B)(iv) exempts from consideration for Medicaid eligibility any assets transferred to a trust for the sole benefit of a disabled individual under 65 (including transfers to a (d)(4)(A) trust).  Thus, if you have a Special Needs Trust, whether third-party or a Self Settled (first-party, pay back or d4A), that is Irrevocable, and a Sole Benefit Trust, the trust is allowed an exemption the same way as an individual, subject to the same phase-out limitations.

Internal Revenue Code §642(b)(2)(C)(ii) provides:  “A trust shall not fail to meet the requirements of sub-clause (II) merely because the corpus of the trust may revert to a person who is not so disabled after the trust ceases to have any beneficiary who is so disabled.”  Thus, a third-party SNT may also qualify for the individual personal exemption under 642(b)(2)(C), by definition.

What happens if the SNT is a grantor trust?  It seems to me that the Sec. 642 personal exemption only comes into play if the trust itself is taxed on the income, and not where the trust falls under the grantor trust rules.  So if you set up the SNT as an intentionally defective grantor trust, the issue becomes moot.